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Below is another great study profile at cxoadvisory.com with regards to value stocks and positive earnings surprises. The study was conducted by Zhipeng Yan and Yan Zhao and CXO summarizes below:


Using stock price, earnings estimate and accounting data for a broad sample of firms over the period June 1984 through December 2008, they find that:

  • Value stocks are less volatile than growth stocks around earnings announcement dates.
  • Value stocks exhibit much larger positive drifts than growth stocks after positive earnings surprises and positive earnings announcement abnormal returns.
  • Growth stocks exhibit much larger negative drifts than value stocks following negative earnings surprises and negative earnings announcement abnormal returns.
  • A trading strategy that is long value stocks with both positive earnings surprises and positive earnings announcement abnormal returns and short growth stocks with both negative generates annualized size-adjusted returns of 16.6% to 18.8% (before trading frictions). Most of the return comes from the long side.

CXO concludes:

In summary, investors may be able to achieve abnormal returns by combining value and earnings surprises, with most of the benefit coming from value stocks with positive earnings surprises and positive earnings announcement abnormal returns.

How could an investor apply this in practical terms? A simple screen for value stocks with recent earnings surprises would be the easiest place to start. I used Zacks Premium screener for the screen below, primarily because they have the most robust screener I have used for earnings surprises.


In addition, I have further filtered the stocks to include small cap stocks (defined here as a market cap of less then $1 billion). There are rationals (such as here and here) for screening for small caps versus the entire market, but one could apply the value/earnings surprise theory to stocks of all sizes.

The screen criteria are below, along with the results using data collected at the end of last week:

  • Last EPS Surprise (%) >= "20"
  • Price/Book <= "1"
  • Last Quarter's EPS >= "0"
  • Twelve Month Trailing EPS >= "0"
  • Avg EPS Surprise (Last 4 Quarters) >= "20"
  • Previous EPS Surprise (%) >= "20"
  • Average Volume (20 Days) >= "25000"
  • Market Cap (millions) <= "1000"

The screen results:

Company NameTickerZacks RankTrendLast EPS Surprise (%)PriceAvg EPS Surprise (Last 4 Quarters)Price / Book
INFINITY PPTYIPCC3Here46.9439.1162.650.9
CABELAS INCCAB2Here61.1112.9850.420.9
CELERA CORPCRA3Here1006.3733.330.87
AMER RAILCARARII3Here15010.7121.250.68
INFORMATION SVCIII1Here9003.52433.330.85
ATLAS AIR WORLDAAWW3Here22.8128.5330.230.81
FIRST INDL RLTYFR3Here21.284.99117.130.23
WINTHROP REALTYFUR3Here118.759.0152.890.72
KADANT INCKAI1Here126.3213.9192.290.87
BANCORP BNK/THETBBK2Here5005.27182.50.54
UTD AMER INDEMNINDM2Here153.336.8553.830.51
OSG AMERICA LPOSP4Here25010.2150.210.37
SALEM COMMSALMN/AHere5503.89172.50.47
PARKER DRILLINGPKD3Here3004.981450.96
PNM RESOURCESPNM3Here53.6611.2988.530.55
QLT INCQLTIN/AHere253.82106.250.67
STARTEK INCSRT4Here205.8968.390.76
SUSQUEHANNA BSHSUSQ3Here1755.571.330.28
KINDRED HLTHCRKND3Here40015.5128.070.64
WILMINGTON TRSTWL4Here171.4312.97127.860.91
REGIS CORP/MNRGS2Here38.115.9932.610.92
KIMBALL INTL BKBALBN/AHere166.677.25116.030.7
SHOE CARNIVALSCVL2Here30015.3363.130.94
WESTELL TECH-AWSTL4Here33.331.1866.670.98

Author's Disclosures: no positions

Source: Combining Value and Earning Surprises for Outsize Returns